Contractors' Questions: Can I wipe the VAT slate clean by going limited?

Contractor’s Question: I would like to turn my sole trader IT business into a limited company, partly because it would open up the prospect of agency work. But when I transfer my business to its new incorporated status, do I get an opportunity to wipe the slate clean in terms of VAT? I’m asking because I previously incurred HMRC’s wrath when I was self-employed from failing to file my VAT returns on time.

Expert’s Answer: Your goal of a clean VAT record is achievable from establishing a new company but it’s not straightforward. 

Firstly, you would need to approach HM Revenue & Customs for a completely new VAT registration which, aside from the potentially long time it takes, can be troublesome.

This is because you risk unsettling your existing customers and will have to make administrative changes, both as a result of HMRC issuing the business with a new VAT number, which your clients and internal systems won’t recognise.

Choosing to transfer your current VAT number, which is possible, will however see your limited company inherit the chequered VAT history of your time as self-employed. If you opt for a new VAT number, bear in mind that any agreement your sole trader business has with the Revenue will lapse when registration for Value Added Tax is cancelled – known as de-registering for VAT.

A further complication is that, given your current business doesn’t have a clean VAT record, HMRC can insist security from a business on the grounds that its management has a history of ducking VAT obligations.

While this would make the registration process more complex, you should then consider whether you can take advantage of the one per cent discount under the flat rate accounting scheme, on offer to newly VAT-registered businesses.

The expert was Adrian Houstoun, VAT partner at chartered accountancy firm Kingston Smith LLP.